Sunday, January 20, 2013

Enphase Energy ( Nasdaq - ENPH ) -- Price Pressure Persists

Enphase Energy (ENPH $3.75) appears on track to report unexceptional Q4 results.  Enphase is the leading provider of microinverters that convert DC power generated by solar panels into AC electrical current.  Most of the solar industry uses string converters.  Those are large units that sit on the ground and convert an entire string of panels.  Microinverters are attached to each individual panel.  The string units are less expensive.  And their prices are declining quickly in response to engineering improvements and relentless competition.  Microinverters generate more electricity output, typically 10%-15% more.  String converters are limited by their worst performing panel.  If a single panel becomes impaired -- for instance by leaves, shadows, or debris --the entire system is affected.  Microinverteers enable each panel to produce at maximum output.  New financing arrangements in the U.S. residential solar market are encouraging system installers to emphasize price more than output.  Those schemes are cutting into Enphase's potential market, thwarting the company from growing as rapidly as it might.

A next generation product line could open up the commercial sector.  To date Enphase has serviced the residential market.  New systems slated for introduction early in 2013 promise to address the small commercial area.  Even larger units are planned for 2014.  Commercial building owners are likely to be more alert to the energy savings Enphase devices produce.  So even though lower initial prices for string converters will remain a competitive issue, acceptance could prove high.

Expansion outside the U.S. offers further potential.  Enphase concentrates on the U.S. market presently.  More than 90% of sales are to domestic customers.  Much of the rest is made in Canada.  New distribution channels are being developed to enter Europe and Asia.  The European market contracted markedly in 2012 due to the economic crisis, which caused subsidies to vanish.  Asian demand is picking up, although tariffs are on the rise to prevent imports.  Enphase is beginning from virtually a zero base, though, so at least some incremental benefit is likely.

We estimate 2012 earnings finished around minus $.80 a share.  Next year margins could improve as fixed costs are spread over a broader base, and direct costs are reduced consistent with selling price declines.  Our estimate is a loss of $.25 a share.  A move to profitability could occur in 2014.  The long term outlook remains uncertain.  U.S. tax subsidies equal to 30%-40% of a solar system's cost are scheduled to disappear in one fell swoop in 2016.  Further improvements in solar technology are likely to offset some of that.  But unless regulatory costs are brought down and electric utilities are given incentives to embrace solar, profitability might remain challenged well into the decade.

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